The Principal Residence Exemption

For as long as I can remember the sale of a principal residence (if there was no taxable capital gain) was generally a free pass. No reporting or filing to Canada Revenue Agency (“CRA”) required.

Many people do not realize that, as of 2016, the long-standing administrative policy of the CRA has changed. Individuals are now required to report the disposition of a principal residence, even if there was no taxable capital gain remaining after applying the Principal Residence Exemption (the “Exemption”).

In the past, such a filing was only necessary for individual taxpayers where there was an actual capital gain to report on the sale of a principal residence. Examples where a capital gain may be realized could be: when the property was not the principal residence for each year of ownership; or if some portion of the lands did not qualify for the Exemption.

Beginning in 2016, for every disposition of a principal residence that occurs (on or after January 1, 2016), the owner is required to report the sale to the CRA on the owner’s tax return for that year.

In reporting the sale, you will be required to identify the year the property was acquired, the proceeds of the disposition and a description of the property to be designated as the principal residence. The required reporting is also necessary where there has been a change in use of the property or the death of the owner of the property occurs.

The CRA confirms on its website that if the residence did not qualify for the Exemption for every year it was owned one would be required to identify and report the part of the capital gain on the property that related to the years during which the residence was not a principal residence. There are also important changes for trusts and non-residents that should be considered carefully in assessing the availability of the Exemption.

The important factor to keep in mind is that you may only claim the Exemption where the disposition and designation of the principal residence is actually reported on your tax return. This is a substantial change in the CRA’s administrative policy and any failure to make a proper or any filing may have quite negative consequences to individuals who are unaware of this recent change.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business law group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.